WidePoint Corp (WYY) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the WidePoint Corporation third quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS) This conference is being recorded today, Monday, November 12th, 2007.

Now I would like to turn the conference over to Mr. Cale Smith from Hawk Associates. Thank you. Please go ahead, sir.

Thank you Vince. Good afternoon. This is Cale Smith from Hawk Associates. Welcome to the WidePoint third quarter 2007 conference call. On the phone today are Steve Komar, CEO of WidePoint, Jim McCubbin, the Company's Chief Financial Officer, and Dan Turissini, WidePoint's Chief Technology Officer and CEO of the subsidiary of ORC.

I would like to begin by reading the Company's Safe Harbor statement, and then we will hear from Steve, Jim, and Dan before they take your questions. This afternoon's discussion contains forward-looking statements that involve known and unknown risks and uncertainties, or other factors not under the Company's control.

Those risks may cause actual results, performance or achievements of the Company to be materially different from the results, performance or other expectations implied by these forward-looking statements. These factors include but are not limited to those detailed in the Company's periodic filings with the Securities and Exchange Commission.

Now, here is Steve with his opening remarks.

Thank you, Cale. Good afternoon, everyone. As CEO of WidePoint, I would like to welcome you to the Company's third quarter investors call, and of course, to thank you for your time and interest in WidePoint.

During our last quarterly investors call, we spoke with you and essentially confirmed what we had indicated earlier, which was that we felt that the first half of 2007, that the Company would experience some weakness in performance, due to external conditions in the marketplace and in the government sector. In fact, we confirmed to you that that was the case.

We also indicated in the last call that we felt that the outlook for improvement in both revenue and earnings during the third and fourth quarter, the second half of 2007, would be substantially improved. I am pleased to report today that our third quarter results are reflective of such improvements. Our revenue performance and growth was positive in the third quarter, versus the prior calendar quarter, as well as the prior year's quarter.

More importantly, we experienced some dramatic revenue increases in our PKI business. We also had a very strong quarter in terms of increasing our business backlogs, represented by, #1, our new Lockheed relationship in regard to the Transportation Workers' contract, an expanded Department of Commerce relationship, and several other opportunities that increased our backlogs. We thought it worthy to report those, but in fact, we continue to be focused on those on a quarter to quarter basis, and we would expect to add to our business backlogs during the fourth quarter as well.

In addition to that, our gross profit margins improved. Our year-to-date gross margins through 2007 are at 28%, versus a 22% performance during the year-ago 9-month period. We also realized bottom line profitability for the quarter just ended, and while that is not a be all and end all, it is definitely an indication of our business model performance, and improvements in the bottom-line performance of the business itself.

These results are gratifying to us, but again, more importantly, they are representative of some of the trends and traction that we are experiencing in the PKI businesses, and the beginning of some improving trends in our consulting businesses, which we had indicated to you had been lagging. But as an indication, our revenues for the quarter just ended, were 30% improved versus the prior quarter, and we hope and believe that this is a continuing trend, and a recovery on some of our consulting businesses.

I would like to take a moment and look to the future a bit. As you know and we talked to you all the time about our dual focus, on maximizing both our organic growth and seeking expansion through strategic alliances and acquisitions. We remain pretty seriously focused on organic growth. Dan Turissini will talk to you a little more about our current initiatives and organic growth and business development, and the identity assurance marketplace.

As to alliances and acquisitions, I can tell you that we have recently formed close strategic alliances with two companies, each of which have the potential to enhance the product and services footprints, that we offer to our target markets and to accelerate our growth rate profile. I do hope to be in a position to share additional information with you regarding these relationships in the very near future. Net/net, we are feeling very positive about our progress, the state of the Company, and both our near and medium-term opportunities for strong performance in 2008 and beyond.

I would like to turn it now to Dan and Jim for their respective run-downs on operational and financial highlights for the quarter. Dan, if you would take it.

Thank you. Good afternoon, everyone. I would like to start with a quick thank you to all you veterans out there. I hope you had a pleasant and good weekend, and our thoughts are with all of you.

On the business front, we have had a very busy quarter, marked by a re-up, or resubstantiation of all of our past customers in the credentialing community. Everybody that we have been working through the last year or year and a half has signed up for another year, and we are proud that that is going forward. We are still maintaining the highest level of credentialing flow-through of any organization, and we are happy that we are still a leader in this space across the government.

This quarter has also been marked, as Steve said with a couple of new relationships. The most notable are the relationship with Lockheed Martin, that has spawned and is growing as we speak. We have developed a new capability under our PKI suite, to support the Transportation Workers, and we are looking with that, to support not less than 750,000 folks in the short-term, one-to two-year timeframe, with a potential uptick of about 6 million users over the next 5 years. So we are real excited about that opportunity.

We have also aligned closely with a nonprofit organization called FiXs, which is a Federated credentialing capability. They have a unique arrangement and agreement with the Department of Defense for physical security, and linked with our medium hardware assurance PKI, we are able to offer a combined offering to the DoD and its contracting community, both a physical and logical access capability, that makes them both compliant with the DoD assurance level requirements, as well as the upcoming HSPD-12 requirements that are in the FAR and the DFAR requirements for the regulations around DoD, Department of Defense acquisition.

And we saw a nice spurt growth in third quarter, but that is coming with a leveling in the fourth quarter, as we prepare for what we believe is the very interesting 2008. Because of our relationships and the different changing environment for medium hardware assurance in the DoD and the contracting community, we are now in a process of deploying enrollment capabilities throughout the continental United States, in various locations with our partners, that will allow us to do the enrollment and credentialing of these certificates on smart cards outside of significant-sized military bases, so that folks can come in and out both on the physical side and the logical side.

So we are, in effect, franchising our back end as we have been on the HSPD-12 side, and growing another, spawning another growth area in our business plan, to credential as many folks in this country as possible, and increase the level of assurance throughout that domain.

So what we are going to see is quite a bit of work in preparation for the 2008, as the money pops out this quarter in funding, which is going to lend itself not only to the DoD and its contracting community, but also the First Responder community, and this alliance with FiXs and with Lockheed Martin, now opens up quite a few new domains of interest throughout this PKI capability. So we have a very bright future and looking forward to the hard work over the next quarter, and the fruits of that labor over the fiscal year of 2008.

Jim?

Thank you, Dan. That was a nice summary of some of the great opportunities that we are looking towards in 2008, and where it is going to come from. Well everyone, the third quarter again was a have been productive quarter for us at WidePoint, as both Steve and Dan have pointed out.

We added several contracts and renewals that added an additional 28 plus million to our present backlog, posted a 100% renewal rate from last year's agency awards, added several new clients to our roster, and we continue to work on several exciting new prospects and opportunities for next year, as we expand our reach beyond the government sector into the commercial sectors, all positive events priming the pump we believe, for future financial success for the Company as we look forward towards 2008 and beyond.

On the financial front, we experienced continued growth both at the top line and within our PKI segment, from both a quarter-to-quarter and sequential perspective. We witnessed a 437% increase in our PKI segment, and witnessed the bottom end turnaround within our consulting segment, all-in-all providing for growth in our gross margin.

We are also pleased to have witnessed validation of the profit potential within our PKI segment. In examining the quarter-to-quarter comparisons, the revenue growth clearly demonstrates how the model drops positive results to the operating income line within the segment, with operating income for the third quarter of 2006 generating approximately $32,000 in losses on revenues of approximately $245,000, to operating income of approximately $300,000 on just revenues of approximately 1.3 million in the third quarter of 2007, clearly a validation of the financial business model.

Well taking this into consideration, along with the leveling of our SG&A expenses, this all led to a slight profit during the quarter of a little under $200,000. Factoring away amortization and depreciation, that number grows to approximately $300,000, and all of that together contributed to the growth in our working capital, from approximately 3.5 million to $3.7 million. All-in-all, positive forward financial progress for our Company.

So ladies and gentlemen, for the quarter, we grew revenues within our PKI segment, won additional contracts, positioned the Company with additional partners, improved working capital, and positioned ourselves with a number of exciting opportunities to look forward to in 2008 and beyond, that we hope will expand our reach into a number of state, healthcare, and mobile and wireless environments.

So that, Steve, back to you.

Thank you, Jim and Dan. Hopefully that was of value, with expanded information to our listeners. I think what we can do now is open up the session to questions and answers, and I would like to give the attention to our moderator, Vince, to help us do that. We should be able to get started.

Thank you, sir. We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS) Our first question is from the line of [Mark Ertelmeyer], a private investor. Please go ahead.

Hi, everybody. Thanks for the briefing and congratulations on the outstanding percentages that you presented today!

Thank you, Mark. I appreciate that.

I am working off the financial document that was put on the website. I guess my question pertains to the amount of outstanding shares, and I was wondering if you could comment on the 25% increase in the amount of shares that, and if you plan on continuing that for acquisition or capital funding? Thank you.

Mark, I think the 25% increase has us all looking at one another, but I think I will let Jim respond to your question, and go from there.

I am trying to figure out, where you are looking at that? We have not issued any shares respectively over the period. There was some preferred shares converted to common, and there is a difference in that. But that all goes back to the original financing in 2004. We have not, since 2004, have been issuing equity.

Okay. So the diluted weighted average shares outstanding at the end of September '06 was 47.4 million, and at the reporting period in '07, it is 57.5 million.

Okay. Well, the 44 million was, did not include any preferred stock. That was converted after the period, or during this period that we are reporting now. The 57 million, okay, that you are referring to references the Treasury effect of taking into consideration all of the options and warrants that were issued back in 2004 as well. So it is just the flow-through of any conversions that have occurred, and moving towards a dilutive number that is presented when you start making money.

Okay. Thank you. Do you think that the amount of shares outstanding will be stabilized in the next year?

The shares outstanding have been stable since approximately 2004, just to make sure that we are on the same page. It's just the present--

I am talking the diluted shares.

Okay. We have not issued shares since 2004, so I mean, based upon that, it is standard. The only time we would issue equity, is if there would have been some accretive transaction, where we would increase the benefit to the shareholders.

Okay. Thank you. One more question before I hog this thing. On the backlog that you currently reported a big number, how much do you think will contribute to revenue this is year, and how much will contribute to revenue next year?

Most of the backlog was won in the end of the third quarter, so we will see some of it be picked up in the fourth quarter. Materially, you will be seeing it flow into 2008 and beyond. We don't have absolute control over the backlog number for two reasons. One, it depends on how fast Lockheed Martin and others can actually roll out what they are working on. So you can see it go anywhere from two years at best case to five years.

If I took the 28 million, and your average contract period of performance is what? Three to four years with options?

It could be, right.

Use that as an example, yes.

You are not booking your options in your backlog, are you?

Booking our options?

Are you booking the basic year or basic and options?

Oh. Our backlog is the potential total that we book, as you put it.

This isn't a government contract, as you're used to with options. This is a, it would be both of these. Actually, it is a combination of four things, are all flat contracts based on a rate of deployment. So it is not X amount of dollars per year, and it is not an option to exercise. It is a not to exceed a certain amount of enrollments, and --

Okay. I understand completely. Thank you.

And then what we are doing, though, is that is just what we are adding to our backlog. Okay?

Thank you. Our next question is from the line of [Alex Zanjeer] with Deutsche Bank. Please go ahead.

Hi, guys.

Hi Alex. How are you doing?

I am great. Seems like we are going in the right direction here. I had a question on your Q, I looked at subsequent events, and you guys entered into some agreements with Protect, which when I go and look at their website and see what they do, seems like there are some similarities to what PKI does, but really focused on the wireless base. Can you clarify to us what is the essence of the agreement here, and to the extent you guys can comment, what are you trying to achieve here?

Well, Alex naturally you would come up with a good sensitive question. So forgive me when I say that we will be a little limited in how we can respond to you, but I think you are correct in your assessment. That company has what we consider to be a very potential product offering, focused on the protection of data in motion, using the 24 and 8 bit encrypted tunnel technology, and we have in fact been working with them, in terms of trying to expand the relationship with them. I don't know if Jim wants to say anything more in regard to that, but that is about all I can say at this point.

Alex, we are excited about the opportunity. Right now we are working with them. So we will leave it at that.

Okay. Thank you all. I will wait and hopefully will find something out in the future.

Sounds great, Alex. Appreciate that.

Thank you. Once again ladies and gentlemen, (OPERATOR INSTRUCTIONS) And management, there are no further questions at this time. I will turn it back to you for any closing remarks.

Thank you, Vincent. I appreciate that. I would like to believe that we have had a good call, and the fact that we haven't had too many questions, hopefully means that we have been able to communicate a decent message back to you.

I would just say again, we are quite excited about both our near, medium, and long term prospects. The business is looking very healthy, and we really look forward to the opportunity to meet with you again during the coming quarters, and hopefully tell you a story that will make you all smile, and we look forward to that opportunity.

Until then, Happy Thanksgiving to all! Holiday greetings from all of us! And we look forward to next time around. Thank you very much.

Ladies and gentlemen, this does conclude the WidePoint Corporation third quarter earnings conference call. We thank you for your participation. You may now disconnect.